A tax-evasion scandal ensnares Chinese film-production companies

IT IS hard to go a day in China without seeing Fan Bingbing. The doe-eyed starlet gazes from film posters (she has averaged four films a year for the past decade), airbrushed ads for global brands and glossy magazine covers. But in the past week she has graced articles about tax evasion. Shares in a film-production firm that she partly owns fell by 10% on fears that it might be ensnared in a scandal in which actors have allegedly concealed their salaries. Ms Fan has denied wrongdoing. On June 3rd the government began a probe into tax compliance in the entertainment industry.

The controversy began when Cui Yongyuan, a TV presenter, described two anonymous contracts on Weibo, a microblog, one for 10m yuan ($1.6m) and another, linked to the first, for 50m yuan. He said it was a case of the “yin-and-yang” payments prevalent in the film business: reporting a low salary for taxation and pocketing a larger sum. Share prices of big film firms, such as Huayi Brothers, also plunged.

Get our daily newsletter

Upgrade your inbox and get our Daily Dispatch and Editor’s Picks.

Yin-and-yang contracts are illegal but common, from the property sector to football clubs. For years the government has tried to crack down on them. In one high-profile case, Liu Xiaoqing, a popular actress, was imprisoned in 2002. But the emergence of tax havens inside China is now complicating matters. Film studios have been among the most aggressive in taking advantage of them.

Their destination of choice has been Khorgos, a desert outpost in China’s far west, next to Kazakhstan. The central government hopes to build it into a key link in trading networks that traverse central Asia. Companies that register in Khorgos enjoy a five-year holiday from corporate taxes, followed by another five years in which they pay only about half.

In 2017, 14,472 firms registered themselves in Khorgos, up more than fourfold from 2016. Local tax revenues have soared. But many of the firms nominally based in the dusty border town do not actually do anything there. Roughly nine in ten are in asset-light industries, such as media and also financial services. Ms Fan is one of dozens of celebrities who have registered corporate entities in Khorgos. For private-equity firms, Tibet has become a popular locale for registering funds, also thanks to tax discounts.

Tax havens and yin-and-yang contracts highlight the holes in China’s tax system. The International Monetary Fund estimates that government revenue from taxes on personal incomes is only 1.2% of GDP, compared with around 10% in many advanced economies.

China’s film business is booming; box-office revenues were $8.6bn in 2017, up from less than $1bn a decade ago. But with the Klieg lights glaring on Khorgos, studios and stars will probably have to start sharing more of their riches with the government. For all the glitz and glamour of its film industry, China is still working out the basics of efficient taxation.